The quality of a company's management team can have a huge effect on the results, but to what extent should investors get to know them?
When buying into a company, the quality of the management is very important -- how they run the business will make a huge difference to your returns. But how can you tell if they're up to the job?
One way is to meet them. Anthony Bolton is a big advocate of this: "A key input into our process is meeting the management … all businesses have good and bad points. I like managers that give a balanced view".
What about small investors?
The average small investor, however, will not find it quite as easy to arrange a chat with the CEO as Bolton would. But having said that, the boards of companies present to shareholders at their AGMs, while others make a point of meeting the public at various events, such as the meetings organised through our discussion boards.
Partly, it's about the specific information and issues relating to the business. While this can help your understanding, there is often a limit to what directors can tell you. If they did happen to reveal some price-sensitive information that was not already in the public domain, insider trading rules would prevent you from dealing in the shares. Directors will also be particularly reticent during the 'close period', that is, the time between the end of a financial period and the publication of the results.
But it's also about your general impression of the team. Do they appear to know what they're doing? Are they open and straightforward? Do they inspire confidence?
The case against
On the occasions when I've spoken with directors, I've always found them to have a very convincing case. And that in itself is a problem: It's their job to be credible. The CEO didn't get where he is today by playing down the prospects of the business.
They're not being dishonest either; most genuinely believe their own spin, rightly or wrongly. In the wake of the dot com bubble, many directors topped up their holdings as their share prices continued to slide lower.
So while Bolton likes to meet them, Buffett does not. "There is adequate information out there to evaluate a great many businesses. We do not find it particularly helpful to talk to managements … The managements are not the best reporting parties in most cases. The figures tell us more than management. … Before we buy a business, we look at the record to determine what the management's like."
Jim Slater, in his recent interview with David Kuo, highlighted another downside of talking to management: "The problem is that if you're not careful, you develop a relationship, and then you don't want to let them down and you don't want to cut your loss. … I like to stick to the figures."
So I guess it's different strokes for different folks. Personally, it has never been a significant part of my process, but other Fools find it essential and seem to benefit from it. What do you do?
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